We have seen, in recent years, a clear growth movement in the number of products offered by companies, SKUs were created with different combinations of colors, sizes and packaging; at the same time, we also observed a considerable shortening of the life cycle of products, generating a high turnover in the portfolio of companies. It is remarkable the efforts of the marketing teams in searching for the goods that are more adhering to the demands of an increasingly demanding consumer, aiming to better serve them.
Maintaining a broader and less perennial portfolio, however, generates non-trivial impacts on supply chain management. What is the added complexity of managing more products? What is the cost of this increased complexity? What is the cost associated with adding each new product? Reflection on these questions leads to the conclusion that The introduction of new products to the market must be carried out in a coherent and structured manner, with the integration of the most diverse areas (marketing, commercial, logistics, production, finance, etc.). Launching products targeting new markets and consumers is a double-edged sword, and it is possible that it ends up as a tremendous “shot in the foot”. If there are cases of great success with increased sales and revenue, the opposite effect can also be observed.
I narrate below a real case that we came across during a project, the real names and values were changed to preserve the confidentiality of the client.
The aforementioned company already worked with 3 product segments: GOLD, for the premium public with greater purchasing power; SILVER, a high quality solution at a fair price; and BRONZE, aimed at those with the highest cost-benefit ratio.
Against the recent stagnation of sales volumes and envisioning the opportunity to serve a supposed new market segment (emerging class C), the company's marketing team decided to create a new family of products, COPPER, for this consumer profile with lower purchasing power, which would be an “orphan” of this type of consumption, by offering a product with more modest pricing and tighter margins, as shown in Figure 1.
Figure 1 - Unit price of segments
Source: ILOS
The idea was approved in Year 1 and a pilot was introduced in Year 2. The first results were encouraging, the market was receptive to the new product. In Year 3, sales were expanded to all regions served, with demand still under control in the first quarter. After the official launch in the second quarter of Year 3, the new COPPER segment achieved considerable growth, as shown in Figure 2.
Figure 2 – Segment sales series
Source: ILOS
Behind the success of this new family, a drawback remained hidden. While the COPPER segment had increasing demand, the company's total sales volume maintained its unchanged trend. Analyzing more carefully, it was identified that the BRONZE segment was to blame, which had dropped in demand more and more quickly, as shown in figure 3. As a result, the mix became less and less premium due to the increased share of COPPER products, which had a minimum contribution margin.
Figure 3 – BRONZE sales series before and after COPPER
Source: ILOS
This made us suspect that there was a case of cannibalization, that is, the new product was “stealing” demand from an existing product. Instead of capturing new sales, consumers perceived this new family as potential substitutes for the BRONZE category. As the differentiation was poorly perceived by consumers, there was a migration to the category that seemed more favorable to them in financial terms. This process was confirmed through a more robust statistical analysis carried out in more granular databases, as shown in the table below (the closer to -1 the ratio, the greater the degree of substitution).
Table 1 - Relationship between segments
Source: ILOS
Even with this result and the diagnosis, however, the commercial and marketing teams were afraid to withdraw the COPPER segment from the portfolio. Because, once the new family was launched, a group of consumers was already created that showed preference and loyalty to these new products. The withdrawal, therefore, could lead to a migration of consumers to other products, including those of the competition. In the end, the product launch did not have positive results, it destroyed value and created a loyal group that will be sensitive to any changes, not to mention the increased operational complexities in sales forecasting, distribution, warehousing, inventories and even even in commercial processes arising from the management of a broader portfolio. Teams will now need to use their creativity to solve the created problem.
Conclusions
Portfolio management is certainly one of the greatest challenges facing organizations today. The expansion of the product portfolio, on several occasions, was not accompanied by a boost in related sales, but generated non-trivial complexities in the companies' operations areas. Furthermore, if the launch fails, as in the narrated case, it is possible that the company becomes hostage to a specific group of consumers (less profitable). As a result, despite the creation of large portfolios, customers are able to absorb only a small portion of the total offered.
Finally, I would like to stress that I am not advocating against launching products, quite the contrary, there are several cases in which there was a major disruption of the market through product innovations. I reinforce, however, that the launch of products cannot be a shot in the dark, we must learn from success stories, especially in which there was a careful evaluation of consumption moments and effective channel management. Only then, through an alignment of marketing, sales and operations, is it possible to ensure that the launch of the new product is a success.
